The Financial Post has published a piece on Canadian bank preferreds: PIMCO questions Canada’s love for bank preferreds:
“I’m not buying them,” Mr. Devlin said in an interview. The problem with preferred shares is that investors are ignoring significant risks that could show up down the road, he said.
Mr. Devlin said Canada is one of a handful of countries where investors are willing to pay such a high price for bank preferred shares.
“That’s the most subordinated debt you can get, that’s the stuff that’s been destroyed [by the financial crisis],” he said. “Tier 1 capital around the world is trading anywhere from 25¢ on the dollar to 50¢ on the dollar. In Canada it’s trading at [a premium],” he said. “Its astonishing, it’s just eye popping.”
An interesting point of view, but not backed up in the article. I will point out that premia and discounts are meaningless. A bond with a coupon in excess of its yield will trade at a premium. A bond with a coupon less than its yield will trade at a discount. So?
I’m sure he said many other things, but the critical question is the yield spread between Tier 1 capital and the Senior debt, and whether that spread is too wide or too narrow. As written, the article is just another “I know the world will probably still exist next week but what if it doesn’t” scare story.
In an essay posted on PIMCO’s website urging BoC purchases of government debt, Mr. Devlin noted:
The good news is that the BoC has time. Canada does not have a major financial institution looking for a significant equity injection at this point. The Insured Mortgage Purchase Plan (IMPP) has worked spectacularly well in re-liquifying bank balance sheets. Canada remains one of only two countries in the developed world where the market is still open for banks to raise tier 1 capital, so Canadian banks have not needed to use the government debt guarantee program.
Many thanks to Assiduous Reader MM for bringing this to my attention!
“That’s the most subordinated debt you can get,”
Always thought preferreds, like common, were equity, not debt subordinated or otherwise. Gee was I wrong!
A bond manager criticizes a security that competes with his fund offerings for retail investor’s dollars. And in other news, water is wet and the sun is hot.